From a legal perspective, a private equity fund can look like a complicated beast (see left). However, the structure of a private equity fund is quite easy to understand once properly explained. Additional complexity can arise from country-specific legislation, but all funds tend to have a similar premise; that is, to provide a vehicle whereby a private equity manager can facilitate investment into investees.

A few objectives lead to the structure being what it is. One major objective is to provide a flow-through entity for taxation purposes. This is to circumvent double-taxation, which leads to investors being taxed at the company level and the personal level if not handled correctly. Another major objective is to qualify for capital gain taxing on carried interest. In the U.S., this is at a maximum of 15%. 

Industry parlance often includes references to limited partners (the investors) and the general partner (the manager). The limited partners are simply the investors who provide money to take stakes in the investees (portfolio businesses). The general partner is the firm (and its staff), which manages the limited partnership (the investment vehicle) and facilitates investments into the investees. The legal theory is that the limited partners have limited liability, whereas the general partner does not.

The second arrow between the general partner and the limited partnership represents the general partner’s financial interest in the fund. This may refer to a direct investment of the fund, but it mostly refers to the right to carried interest. This article talks about “carry” in more detail. The partnership deed outlines the terms such as fees and carry.